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Misappropriation of Trust Funds by Trustee and Other Estate Planning Situations You Should Avoid Like the Plague

By July 24, 2018 February 20th, 2020 No Comments

Misappropriation of Trust Funds by Trustee and Other Estate Planning Situations You Should Avoid Like the Plague

Estate planning can be complicated and it’s not unusual for disputes to arise. Sometimes, however, estate battles can get truly out of hand. The good news is that there is a lot that can be done to avoid all out war.

Misappropriation of Trust Funds by Trustee

The vast majority of estate conflicts arise from one simple thing; the trustee is not a suitable person to handle the responsibility of managing the trust. By law, trustees have a fiduciary duty to the trust. This means that they are required to act in the best interest of the trust and its beneficiaries.

Unfortunately, trustees don’t always take their fiduciary duty seriously. There are far too many cases of trustees using trust funds for luxurious personal vacations, new cars, new boats and all manner of inappropriate things. Often the temptation is just too much for people.

So how is this avoided? It’s avoided when the people chosen to be trustees are the sort of people who have a history of responsible and fair behavior. Trustees should be good at communicating and have solid relationships with most, if not all, members of the family.

But what if it’s already happening?

If misappropriation of trust funds is suspected, the first step is always to take a look at the trust agreement. The trust agreement should tell you what kinds of things the trustee is allowed to use funds for and how they are to manage the assets. Step two is to secure a copy of past activity on the trust account and examine it for misconduct.

If you suspect that a trustee is stealing and they refuse to cooperate with you, it’s probably time to get in touch with an estate attorney.

Trustee Conflicts of Interest

Sometimes the issue isn’t that the trustee is misappropriating funds, but rather that they are caught in a conflict of interest.

In a perfect world, there would never be a situation where a trustee could stand to benefit directly from the misfortune of the trustees. As we all know, however, this world is far from perfect.

One of the more common conflicts of interest that comes up in regards to trusts centers around the family home. When the original creators of the trust pass away, their home typically goes into the trust. It’s often the case that renting out the home and letting it continue to grow in value would be the best decision for the beneficiaries. But some trustees, eager for a new and better house, will arrange to buy the house from the trust at a steep discount. This, of course, makes the trust worth less than it should be and hurts the beneficiaries.

Conflicts of interests can take many forms when it comes to estate planning and it can be hard to anticipate all of them. But again, when a trustee is a responsible and moral person, these things are rarely a problem.

Commingling of Trust Funds

Another sticky situation is when trust funds have been commingled with the trustee’s personal funds.

As a rule of thumb, it’s almost never good when a trustee is moving money back and forth between their personal accounts and the trust account. It’s not acceptable, for instance, for a trustee to make a loan to the trust account and then withdraw that money back into their personal account at a later date.

A trustee, again, has a fiduciary duty to the trust. Part of that is the responsibility is to keep trust money separate from personal money. When this doesn’t happen, it’s likely that there will be litigation in the future.

How do you avoid this? You guessed it! Make sure the right person is trustee. A responsible trustee will understand the need to keep funds separate and will make sure it happens. They will have a clear understanding of how a trust should be managed and the rules around that.

 

Trust Language that Isn’t Clear

While most estate planning issues come up because trustees aren’t up to the task, there is one case where the blame falls more on the original creators of the trust and the lawyers that helped them do it.

There are far too many estate lawyers out there who provide only basic cookie cutter trusts. They have a template that they use for everyone who walks through the door and there’s very little attention paid to the nuances of the family they’re dealing with.

This can be avoided by vetting estate attorneys beforehand. Make sure the attorney actually does specialize in estate  litigation and consider asking for references. And if you feel uncomfortable with the final product, a second opinion is not a bad idea.

It’s Going to Be Tough

Many an otherwise happy family has been split right down the middle over the mishandling of estate situations.

Fortunately, there is much that can be done to avoid that. 90% of estate problems come down to whether or not the creators of the trust chose appropriate trustees and communicated expectations with them. The other 10% comes down to whether or not the trust was well written in the first place.

If you’re currently dealing with the fallout of bad estate decisions, take heart. There are good attorneys who can help you get back on track. The process might be long, but in the end it will be worth it to see your family’s money managed in a way that is honest and fair to everyone.

It can also be beneficial to speak with a financial planner or advisor. We often have a unique perspective on the specifics of how a trust account should be managed and can prove a valuable addition to your team when you’re facing a difficult situation.

If you don’t have a financial planner or advisor, Vector Financial Solutions is a good place to start. I run Vector from a small office here in sunny north county San Diego and have been helping clients navigate estate conflicts and questions for the past 30 years. My designations as a Certified Financial Planner® and Accredited Investment Fiduciary Analyst® demonstrate a high commitment to my client’s best interests.

Call 760-741-3159 or click here to get in touch.

The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by Sagepoint. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Registered Representative may only discuss/and or transact securities business with residents of the following state: AR, AZ, CA, CO, DE, FL, GA, HI, ID, IL, LA, MA, MD, MN, MO, MS, NM, NV, NY, OK, OR, PA, SD, TX, WA.

Securities and investment advisory services offered through Sagepoint Financial Inc. (SPF), member FINRA/SIPC. SPF is separately owned and other entities and/or marketing names, products or services referenced here are independent of SPF. Sagepoint Financial does not provide tax or legal advice.

David Wilson, writer at Financial Truths, is also a  Certified Financial Planner® and Accredited Investment Fiduciary Analyst®  at Vector Financial Solutions, Inc. Vector Financial Solutions is located at 139 E. 3rd Ave., Escondido, CA 92025 and by phone at 760-741-3159.

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